Results Highlights

• Econpile’s 1QFY18 net profit grew 28.9% Y.o.Y to RM21.2 mln, buoyed by advanced progress billing on certain projects, coupled with the higher billings from its increased orderbook. Revenue for the quarter improved 48.1% Y.o.Y to RM168.9 mln.

• The results were within expectations with its revenue amounting to 23.5% of our full-year forecast of RM719.6 mln, while its net profit came in at 22.0% of our estimate of RM96.5 mln. The slight variance was mainly due to its higher effective tax rate of 27.2% vs. our estimate of 26.5%.

• Econpile’s 1QFY18 gross profit improved 27.9% Y.o.Y to RM34.6 mln, largely due to the higher billings from piling and foundation works for property projects. In 1QFY18, piling and foundation works from the property projects continue to anchor it revenue, amounting 82.8% or RM139.8 mln of the group’s total revenue.

• Going forward, we expect margins to taper owing to the execution of several contracts secured over the past quarters for the piling and foundation works of infrastructure projects that typically yield lower margins.

• We expect its EBITDA margin to come in between 22.0%-23.0% (slightly below the 23.6% reported in FY17) in both FY18 and FY19 respectively as we anticipate piling and foundation for infrastructure works to account to approximately 20% of FY18’s total revenue vs. 8.5% of total revenue recorded in FY17. As of 1QFY18, Econpile continues to maintain a healthy balance sheet with a relatively low net gearing of 0.1x. Econpile has also declared a first interim dividend of 1.5 sen per share – representing 37.9% pay-out from its 1QFY18 net profit of RM21.2 mln.

Prospects

After registering a record high orderbook replenishment rate for FY17 at RM1.19 bln, Econpile has secured three major contracts since June 2017, totaling RM290.0 mln for: (i) part of the bored pile works for Pavilion Damansara Heights Phase 2 mixed development project, (ii) basement works for a mixed development project at Old Klang Road, and (iii) Package GS04 Guideway, Station Park and Ride, Ancillary Buildings for LRT 3. We reckon that its orderbook replenishment should normalise to approximately RM600.0 mln for both FY18 and FY19 respectively (see Appendix 1), in absence of the one-off large scale piling works such as the Pavilion Damansara Heights project worth RM570.4 mln.

Moving forward, earnings growth will emanate from approximately RM1.21 bln worth of unbilled construction orderbook comprising of over 20 ongoing projects (see Appendix 2). Its relatively solid orderbook-to-cover ratio of 2.1x against FY17 revenue of RM581.9 mln will provide earnings visibility over the next 2-3 years. Econpile will allocate approximately RM30.0 mln – RM40.0 mln for CAPEX in FY18 in bid to improve efficiency through hiring and purchasing of new machineries, coupled with research and development to improve processes and equipment.

We continue to like Econpile as a specialist in piling and substructure work, backed by a robust track record of having registered a record high net profit and revenue of RM80.8 mln and RM581.9 mln respectively in FY17. The group is tendering for over RM1.00 bln worth of piling and foundation works. Moving forward, the group could also capitalise on the upcoming mega-infrastructure projects announced under Budget 2018 – the East Coast Rail Link (ECRL), Kuala Lumpur-Singapore High-Speed Rail, Klang Valley Mass Rapid Transit 3 and remainder works under the Pavilion Damansara Heights Phase 2. In the meantime, the group’s proposed 1-for-2 share split, 1-for-4 bonus issue together with 1-for-4 free warrants is expected to be completed by 1Q2018.

Valuation And Recommendation

With the earnings coming within our expectations, we leave our earnings forecast unchanged. We also maintain our HOLD recommendation with an unchanged target price of RM3.15 by ascribing an unchanged target PER of 16.5x to its FY18 EPS of 19.1 sen, which is in line with its peers with similar market capitalisation.

Risks to our recommendation and target price include inability to meet our targeted orderbook replenishment rate of RM600.0 mln for FY18. Rising raw material prices and labour cost that could dampen margins going forward. Any delay in project completion could also damage Econpile’s reputation as one of the leaders in the piling and foundation companies in Malaysia and its ability to secure future contracts.

Source: Mplus Research - 23 Nov 2017